With mortgage lenders slashing rates, should you to jump off your variable mortgage or wait a little longer and get an even better deal?
We asked four mortgage experts for their tips on how to weigh up this tricky decision and what you need to consider.
What will happen to rates in 2024?
While no one has a crystal ball, Knight Frank recently revised their prediction on the number of times the Bank of England would cut rates in 2024 from one to five times.
With headlines like this, those on high variable rates might find themselves with a bit of a dilemma: should you stick, paying a higher rate in the short term with the promise of a lower rate to come? Or cash in your chips now and get an OK fixed rate that might look high in a few months’ time?
“The start of 2024 has seen some considerable reductions from a number of lenders,” says Richard Merrett, managing director of Alexander Hall Mortgage Brokers. “The big high street banks absolutely, but also some of the newer emerging brands such as MPowered and Generation Home. We have a number of lenders now pricing below 4% which is a good psychological level for consumers.”
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While the general consensus is that by the end of the year fixed rates will be much lower, Kevin Roberts, managing director, Legal & General Mortgage Services, flags that you never know what’s around the corner.
“Of course, this is what is happening right now; what happens tomorrow could be very different, with any number of unforeseen factors, including geopolitical events, having an impact,” he says
Even the latest inflation figures were a bit of a shock as they increased to 4% instead of going down, which was widely forecast.
“The figures were not what were expected, and we don’t know how the market will react,” says Hina Bhudia, partner, private office at Knight Frank. “We’re not seeing the data to back up the downward rates.”
Is now the right time to switch?
Much of this decision comes down to the individual. “The needs and circumstances of different borrowers can vary hugely, so there is not necessarily a one-size-fits-all option for those who are considering their remortgage options,” says Roberts.
“For me, the key factor is the borrower’s affordability and attitude to risk; are they going to be worried about potentially paying more on a variable rate? Will they become frustrated if they fix now only to see rates come down marginally?” says Merrett.
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“If they are prepared to wait and see if rates fall and retain flexibility, how long are they prepared to pay a bit extra whilst they wait? The final point that is extremely important is ensuring they have the flexibility to exit a product, not all variable rates are penalty free.”
As well as thinking about how you manage risk, it’s also a good idea to sit down with a calculator and work out what your savings and spending will be in different scenarios and calculate the difference that various decisions will have on your finances.
“Switching to the cheapest possible fixed rate is important…. but all the time you are waiting for the fixed rate to reduce you are most likely paying a significant higher rate than a current fixed rate, hence it is difficult to calculate the best time to switch,” says Adrian Anderson of Anderson Harris.
“Work out your monthly payments on a new fixed rate compared to the variable rate you may pay. How much will you save today?”
How long should you fix for?
If you’ve decided that now is the right time to switch, the next question is how long for.
The choice is usually between two or five years. “A five-year fixed rate should be quite a bit cheaper than a variable rate today, but will the five-year fixed rate look expensive in year three-four-five? The five-year fixed may look like good value if rates do not fall as predicted,” says Anderson.
If rates go down, then a two-year fixed rate would allow you the opportunity to take advantage of this at a later date, while fixing now. “If you really believe that rates are going down, take a two-year fixed at 4.15% — this will give the market time to work itself out and then secure something lower for longer,” suggests Bhudia.
Alternatively, a tracker mortgage, which follows the Bank of England’s base rate rather than a variable rate which is set by the lender, may be a good option.
“We were recommending trackers previously, as they were cheaper and, if someone was adamant that rates were coming down, they were a good option,” adds Bhudia.
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“Trackers are around 5.5%, lower than a Standard Variable Rate, but you can flip out of them onto a fixed rate with no exit fee. There is still an arrangement fee, so you must absolutely believe that rates are going down because otherwise you might end up paying this twice.”
What other factors should you consider?
As always with mortgages, you should pay attention to all the details and make sure you know exactly what you’re paying in total.
“Don’t just look at the headline rate,” says Anderson. “It is important to consider the overall cost of a new rate/product including upfront costs/arrangement fees, valuation costs, legal conveyance costs. There are often early repayment penalties associated with a fixed rate mortgage if more than 10% per annum is repaid.”
Something else to bear in mind is that, if you apply for a fixed rate product and rates reduce during the application process, you should be able to access the cheaper rate.
“Many of our clients purchasing or remortgaging have ‘followed the fixed rate pricing down’ and have saved a considerable amount of interest by switching to a cheaper fixed rate on the mortgage offer prior to drawdown,” says Anderson.
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Whatever you decide to do, it’s important that you always seek professional advice instead of going directly to a lender. It will save you money in the long term. “We have gone from a benign interest rate environment through volatility to a more settled place but one where it is not always obvious what to do, and certainly there is not one rule for all,” says Merrett.
“A good mortgage broker can source the best deal, provide a balanced sounding board in the decision process and, most crucially, continually review the options as the market changes, hopefully to the benefit of the borrower.”
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